How to (try to) divest in South Africa

There are many different ‘flavours’ of divestment, but the departure point for the international divestment movement has been to exclude the 200 publicly listed global companies with the biggest fossil fuel reserves, the so-called Carbon Underground 200. In South Africa, effectively this means excluding Sasol, Anglo American, BHP Billiton and Exxaro from your investments.

Fossil Free SA’s position is that it makes little sense to divest from fossil fuels while still investing in other ethically questionable sectors such as arms, tobacco and gambling, and we hope to apply this standard to any fund that we may help establish.

Individual South Africans are now starting to divest, though this remains technically challenging. Look here for examples of how to do it. Please tell us about your experiences – we’d be very happy to have your feedback, however limited and incomplete your own divestment journey may feel.

Fossil Free South Africa has been looking into the prospects of establishing our own fossil-free fund, and while it’s proven harder than we hoped to get one going, we’re not giving up! Please email us if you would be interested in investing in such a fund, or sign up for our newsletter to get news.

The options below are a quick list of ways in which to partially divest. Note that the options we list here are not intended as investment advice or recommendations, but as options to consider within the context of your personal investment imperatives.

Quick summary of how to divest (or not):

  1. If you are confident managing your own share and investment portfolio, consider building one that excludes major emitters – most especially Sasol, Eskom (bonds), Anglo American, BHP Billiton, Exxaro, African Rainbow Minerals – and those who finance them.
  2. If you are not a confident direct investor, and rely on financial service providers for pension/provident/unit trust options, divestment, we have to admit, remains very difficult for ordinary people. We do hope that with the possible establishment of our own fund that it may become slightly easier. We can, as of January 2018, advise that a major international financial data provider may soon be launching products for the SA market that will assist in the creation of low-carbon funds.
  3. However, you should challenge your financial service providers by asking them to specify the carbon footprint and carbon risk of your portfolio; and tell them that you want to divest, and that they should give you that option.
  4. We can, as of August 2018, also say that we hope to see the first South African fossil fuel-free fund that excludes the Carbon Underground 200 launched by mid-2019. Details to follow.

Best current options for partial divestment

The Kigoda Sustainability Basket on the EasyEquities platform

Kigoda Consulting has recently established a “sustainability basket” on the Easy Equities low-cost trading platform, which you can read about here. This is not specifically a low-carbon fund, but it is another good step towards creating a sustainable investment option for the SA market.

Nedbank’s Green Savings Bond

One semi-green fund that we know of in South Africa is Nedbank’s Green Savings Bonds:

The Nedbank Green Savings Bond is a fixed term investment (18, 24, 36 or 60 months), offering great rates and capital security. In addition, it is the first savings bond in South Africa to offer consumers the opportunity to contribute towards the creation and development of the Green economy. It does this by earmarking the capital raised to finance renewable energy projects, at no risk or cost to investors.

The appeal of the Nedbank Green Savings bond is somewhat dimmed by the fact that Nedbank continues to actively invest in new coal power in South Africa, though it has said it will cease doing so from 2018. For example, in October 2016, Nedbank joined a consortium of bankers financing the Thabametsi and Khanyisa coal independent power stations. See also this independent comment on how the product is advertised.

WWF-Prescient Living Planet Fund

WWF is supportive of divestment efforts, and in South Africa, manages a Living Planet investment fund that is lower-carbon than the JSE as a whole and ‘aims to deliver sustainable long-term capital growth within a framework that integrates environmental sustainability principles’. The fund excludes any ‘direct investments’ in:

• Arms & weapon systems
• Nuclear power production
• Coal-mining companies
• Trade in CITES Flora & Fauna
• Tobacco
• Animal testing for cosmetic purposes
• Pornography

It also restricts investment in oil, gas, coal extraction, and companies with high water resource impacts.

As of June 2018, the fund does include a 2.3% share in BHP Billiton, a company listed on the Carbon Underground 200.

The minimum investment is R10,000, or R1,000 a month by debit order. The total investment charge is 1,66%. The annualised return since inception in May 2012 has been 6,74%.

The Sun Exchange

The Sun Exchange is an innovative South African-based platform that allows ‘anyone [to] go solar and start building wealth powered by sunlight. Buy online in minutes. We accept national currency and Bitcoin.’

Other climate-linked investment products

3 Laws Climate Change Eq Prescient A1

3 Laws Capital has listed a fund on the Prescient platform that aims to ‘take advantage of opportunities that arise from companies affected by climate change and debt opportunities afforded by renewable energy projects.’

The 3 Laws Climate Change Equity Prescient Fund will seek to follow an investment policy which will secure for investors long term capital growth. In order to achieve these main objectives the investments to be acquired shall comprise selected shares across all industry groups as well as across the range of large, mid and smaller cap shares.

Founded in 2013, the fund has a very small capitalisation at R15m. It still contains shares, such as Anglo American, that FFSA considers to be fossil-fuel intensive, and others, like British American Tobacco, that are ethically questionable.

Mergence Low Carbon Equity Fund

There is another low-carbon fund open to institutional investment: the Mergence Low Carbon Equity Fund

The objective of the Mergence Low Carbon Fund is to produce a level of return similar to that of the JSE Shareholder Weighted Index [SWIX] while investing in companies with a lower level of carbon emissions intensity on average than that of the SWIX Index… The global approach to exclude high emitters completely is difficult to implement in the South African context without producing a fund with a high tracking error relative to its benchmark. Our approach aims to overweight companies that produce a low level of environmental emissions relative to their economic activity and to underweight those companies that are less efficient or do not measure and disclose their emissions. Companies are compared within similar sectors and across sectors and the Fund is optimised to ensure the appropriate tracking error. This allows investors to invest in an environmentally responsible product that promotes emissions reduction without material impact on their financial return. Investing in this way promotes environmentally friendly practices and operations of listed entities.

This fund has been in existence since 2010, and deserves acknowledgement for making an effort to create a semi-decarbonised fund in a challenging environment, well before the global divestment movement achieved its current momentum. However, the bar it sets itself for decarbonisation is rather unambitious by recent divestment standards:

… the Fund has had an average emissions intensity of 77 tons of CO2 emissions per million Rand of revenue compared to an average intensity of 98 tons for the SWIX index.

There have been no updates on the fund’s performance posted since 2012.

Old Mutual Responsible Investment Equity Index Fund?

This fund was established in 2016. It is, again, an institutional fund. Though a retail offering was initially promised by October 2016, by August 2018 that offering still had not yet materialised, though Old Mutual officials told us then that this will soon change:

The Old Mutual Responsible Investment Equity Index Fund invests in a local universe of shares that are assessed using a two-step ESG screening approach: the MSCI ESG Impact Monitor screening tool and the MSCI ESG Intangible Value Assessment tool. These tools continually monitor the South African universe not just against their local peers, but also against their global peers.The impact monitor assesses whether the companies adhere to the internationally responsible investment norms. A breach of these norms or principles would typically exclude the company from the Index.

There is no available information on the make-up of this fund.

Institutional limitations

One factor that makes it difficult to create decarbonised or ethical funds in South Africa is that there appear to be few available indices on which to base new funds. The JSE’s Socially Responsible Investment Index, established more than 10 years ago, lost credibility over its inclusion of companies like African Bank and Lonmin. As Old Mutual observes:

The [JSE SR] index however received much criticism over the years around lack of transparency, the selection criteria and underperformance relative to the parent index… The flawed selection criteria was demonstrated by the inclusion of stocks like Lonmin and African Bank in the index. And as the repercussions of the Marikana tragedy played themselves out and several issues emerged regarding Lonmin’s financial stability, it continued to be part of the SRI Index. Similarly, African Bank remained in the index until its suspension in August 2014. This has left very little confidence from investors on the quality of the index’s screening.

The JSE has now established a new ‘Responsible Investment’ index. However, the top 30 companies listed in this index, as at November 2016, included major carbon emitters such as Anglo American, BHP Billiton, Exxaro and Sasol… The JSE’s social and responsible investment efforts, in other words, amount to little more than greenwash, and those asset managers that take ESG (environmental, social and governance) factors seriously do not take the JSE’s ESG index very seriously, preferring to rely on their own in-house standards.

Steps to divestment: overview

  1. Please challenge your financial services provider by asking them for alternatives!! Remember, there’s no need to be defensive about this request. If they have put your money in fossil fuels with absolute returns their bottom line, they are arguably neglecting their duties, as investments without fossil fuels in fact outperform funds that include fossil fuels:

MSCI, which runs global indices used by more than 6,000 pension and hedge funds, found that investors who divested from fossil fuel companies would have earned an average return of 13% a year since 2010, compared to the 11.8%-a-year return earned by conventional investors.

  1. If your pension/provident fund has funds invested offshore, consider divesting these funds first. Examples of international institutional fund managers offering fossil-free funds include:

Examples of overseas fossil-free funds accessible for individual investors:

  1. Screen your investments for exclusion of the Carbon Tracker 200.

Other articles on how to divest

These are for the US context, but may be helpful at least for South African investors seeking to divest their overseas investments.

Write to your financial services provider

Template letter 1: If you’re a member of staff or faculty at UCT with pension benefits.

Template letter 2: Non-specific pension fund letter.

Template letter 3: Letter to financial advisor/investment house/bank.

Look at offshore options

South Africans can invest offshore, up to certain limits. While first prize for us is definitely seeing local fossil fuel-free funds created, it’s reasonable to start with supporting offshore funds too. These can be located at Fossil Free Funds and there’s a further guide to divestment offshore hosted by DivestInvest.

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